Brocade Communications Systems, Inc.

About Brocade Communications Systems, Inc.

Brocade Communications Systems maintains silky smooth computer network operations. A leading supplier of data center networking products, Brocade makes Fibre Channel switches and related software for connecting corporate storage systems and servers. Its products are used in storage area networks (SANs), which pool storage resources across enterprises for easier management and more efficient asset use. Brocade's products support Internet connectivity and enterprise mobility, as well as key technologies such as software defined networking (SDN), network function virtualization (NFV), and cloud computing. It generates 57% of its sales from the US. Brocade agreed to sell to Broadcom for $5.9 billion in 2016.

Change in Company Type

Broadcom, a maker of communication-related computer chips, agreed to pay $5.9 billion for Brocade. The addition of Brocade's networking gear to Broadcom's networking chips should help Broadcom better compete for business generated by data centers, cloud computing, and the internet of things. As part of the deal, Brocade's Ruckus Wireless, which was acquired in 2016, would be sold.

Operations

Brocade's products are made by such contract electronics manufacturers as Hon Hai Precision (Foxconn Electronics), Accton Wireless Broadband, Motorola, and Quanta Computer. The company also relies on Flextronics International for service repair.

SAN products -- which include switches, directors, and other products used for data storage -- account for about 57% of sales. IP networking products (Ethernet switches and routers for network connectivity) and global services (maintenance, installation, consulting, and other assistance) contribute about 27% and 16%, respectively.

Geographic Reach

The US is the company's largest market, accounting for just less than 60% of sales. Outside the US, it gets 27% of sales from the EMEA region. The Asia-Pacific region accounts for about 10% of revenue. On its own, Japan supplies 4% of Brocade's sales.

Sales & Marketing

Brocade sells directly, as well as through systems integrators, distributors, and value-added resellers. EMC, Hewlett-Packard, and IBM together generate more than 45% of the company's sales.

Financial Performance

Brocade ended a two-year streak of declining revenue with a 2% increase to $2.26 billion in 2015 (ended October). A 14% rise in the sales of its IP Networking products (up about $76 million) countered a 2% drop ($25.7 million)in SAN product revenue. In IP Networking, Brocade saw increases of sales of its data center routing and switching products, campus products, and software networking products. products , ending a two-year streak of declining revenue. The decrease is SAN revenue came from reduced sales of embedded and fixed-configuration switch products. International sales increased across the board but were particularly strong in Asia-Pacific where revenue increased 26% year-to-year.

In 2015, net income surged 43% higher to $340.4 million from 2014. The increase came from a restructuring benefit, goodwill impairment, and favorable changes in sublease terms. Brocade also had a lower tax bill in 2015.

Cash flow from operations was $447.5 million in 2015, down from $541 million in 2014. The prime cause was higher payments for variable incentive compensation earned in 2014 but paid in 2015.

Strategy

As networking technology relies less on hardware, Brocade is building up its software acumen especially for areas like Software-Defined Networks and Network Function Virtualization. Smarter software is taking on the role of switching and balancing networks loads, a job that had been handled by switches. The company reduce spending on its hardware-based application delivery controller product line and boosted investment in its software-based application delivery controller products. As part of that switch Brocade sold its network adapter business to QLogic Corp.

Beyond its in-house research Brocade is adding software capabilities through acquisitions.

The challenge for Brocade is to ramp up its IP Networking product line to generate more revenue while its hardware-oriented SAN product line loses too much steam. The company aims for customers that prefer to buy networking products from suppliers that offer a portfolio of solutions rather than a supplier with a less robust product portfolio.

Mergers and Acquisitions

In 2016 Brocade said it would buy Ruckus Wireless, which makes products for large-scale Wi-Fi connectivity, for $1.5 billion. Brocade will move to sell its networking products to customers of Ruckus ($373 million in revenue in 2015). It will also open its market to Ruckus products.